Has Buffett hit the Buffers?

The most famous investor of today has to be Warren Buffett.  His acolytes hang on his every word and try desperately to emulate his methods – and with their succes usually falling short in the process.

When asked for his favourite time scale for holding a share, he famously replied: For Ever!

And that approach has stood him (and his sidekick Munger) in good stead during the massive post – WW2 bull markets.  In this period there have been only a few large corrections – with the largest in the 2007 – 2009 period.  But the main trend has been firmly up.

So will this buy-and-hold approach remain useful for ever?  Of course not!  Markets undergo both bull and bear markets, and it seems the longer a bull market lasts (higher highs and  higher lows), the more devastating the next bear market.

A most sobering chart is the very long term Dow chart that shows the explosive nature of the advance over the years

I would venture to say that very few investors/traders see this chart at all in their career.  But they should!  I have mine pinned up on my notice board.

The monumental increase in share prices goes hand-in-hand with the huge deflation (aka Purchasing Power)n in the value of the dollar since the Fed was established in 1913. From then, the dollar has lost over well over 90% – and lost 50% since the end of WW2.  That’s what happens when you let a central bank loose to print limitless money with nothing backing it (esp QE).

The most devastating crash in history occurred after 1929 as the Great Depression got under way, but where is it on this scale? Merely a blip.  Isn’t that astounding?

The most volatile period was in 2000 – 2009, which wiped out a mass of investors, but since the March 2009 low, the market has been a rocket rising from 6,500 to the recent January high at 26, 705, a four-fold gain in less that 10 years.  Some shares have fared far better, of course.

But does this pattern remind you of anything?  The exponential shape reminds me of the great Gold bull market leading up to the blow-off $1,920 top in September 2011.

So there is history to what happens when a market blows off after a lengthy exponential bull market.

After the blow-off, the market descends rapidly following a consolidation period.

Could this be occurring in Buffet’s investment vehicle, Berkshire Hathaway right now?

I have multiple clues.  First, I can draw very beautiful blue tramlines along the action off the wave 4 low of early 2016 with the recent break below the lower tramline.

But before that, I have a reliable EW purple five wave count to the 29 January 2192 high – and that high occurred on a move above the upper tramline resistance.  That thrust was completely reversed a few days later by a sharp decline beneath the tramline to pink support.  That support bounced the market right back up to kiss the tramline before moving down sharply again.

That action created an ‘overshoot’. which is a feature that usually heralds a sharp reversal, which we are seeing today.  You may have noted other recent overshoots in several other markets.  The splendid overshoot in GBP/USD in April that I highlighted forced a 10 cent collapse within 8 weeks

That overshoot was a buying climax (high momentum) that was another bearish signal.

With BRK shares down $32 off the high – or 15% – this could well be the start of a new era when buying dips and holding for the long pull will become toxic strategies.

Is this the end of Buffet’s ‘For Ever’ investment strategy?

For most of us who do not have investment time scales greater than 30 years or so, a devastating bear market now would likely decimate investment portfolios – and there would not be enough time in the 30 years to recover.  In addition, a bear market would also bring the prospect that pension funds would suffer badly (unless they hedge with enough S&P puts,  of course) – and payouts would be hit.

Pensioners would likely take to the streets in protest and taxes will have to rise substantially to protect the pound.

Many say the Fed would step in again with resumption of QE if stocks were hit hard. But I forecast that this would be seen as a desperation move that would induce even stronger selling.  In these circumstances, cash will be king once again as interest rates would rocket.

Has the dollar turned (again)?

I had been bullish the dollar since it had few friends back in Feb/March following a long bear trend with traders taking the view the dollar was doomed as trade and budget imbalances were widening and interest rates were still low.

Of course, these are the ideal conditions when a contrarian view can be most profitable – but your timing must be perfect!

From DXY trading at the 88 area, it rallied in five clear waves to my target at 95 – a most splendid gain.  With that information, I changed my stance last week – and advised short dollar/long euro positions, and taking profits on long dollar positions.

The bear trend was a classic five impulsive waves down to the 88 area and as the market turned, I advised long trades. I set a major target at 95 being the Fibonacci 50% and the wave 4 high (a typical turning point).  Last week”s high should be wave A  of what should be an A-B-C pattern.  Here is the close up of the rally off wave 5 low

This is a textbook five impulse waves up complete with momentum divergence at the wave 5 of A high.

Note that I am using the Elliott Wave Theory extensively since February to guide my forecasts – and without it, I would be floundering around, as so many trades do.  When used properly, it can pinpoint quite precise turns – and give an estimate for targets when taking profits is advised.

I also use sentiment data – and today with bullish DSI sentiment around the 90% mark, the market has the potential to embark on a multi-week B wave – with bullish implications for the euro (where bearish sentiment is like wise extreme).

Crude oil surges, but will OPEC signal a turn?

Yesterday, crude prices surged as traders expect a ‘bullish’ outcome from this weekend’ OPEC meeting.  Production cuts are expected, but even if announced, will this be a superb ‘Buy the Rumour, Sell the News’ event?

Yesterday’s $3 surge was propelled by the huge momentum divergence at the recent low – a clear warning I took to advise VIP Traders Club members to exit short positions!

So now we have a possible overshoot that could herald new highs, or with the market at the Fibonacci 62% retrace, could be an opportunity for the bears to hit it Monday morning in Asian trading.

We do not have long to find out – and I am pleased we are watching from the sidelines as both bulls and bears are suffering from the whiplash action.  I hate that!